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If you’ve never heard of an auto insurance score, also known as a credit-based insurance score, you’re probably not alone.

Insurance scores were introduced in the early 1990s by auto insurers as another factor to help predict the likelihood that an insured driver would have an accident or file an insurance claim.

What is an insurance score?

Insurance scores are numerical scores created by insurers to predict the likelihood that you’ll have an accident or fill out a claim. The scores are calculated from information on your credit reports. Car insurers use auto insurance scores as one of many factors to determine how much you’ll pay for car insurance.

According to Kevin Haney, a former credit bureau employee and founder of Savvy on Credit, “An insurance score uses historical data from a consumer credit report to predict future losses from auto insurance claims.”

But how do insurance scores affect your rates, and how do your credit scores relate to your insurance scores? Here’s what you need to know.

How do insurance scores affect my rates?

The higher your insurance scores, the lower your auto insurance rates will typically be. On the other hand, if your insurance scores are lower, your auto insurance rates will more likely be higher. Of course, insurance scores are only one of many factors that determine your rates and only do so if insurance companies are allowed to use them.

Common Question

Do all states allow insurance companies to use credit information to determine rates?

Massachusetts, California and Hawaii have banned the practice of using credit-based insurance scores to help determine rates. Other states currently allow it.

Each insurance company has its own methodology to interpret the credit information that builds your insurance score, so exact insurance score ranges and how they affect rates are unknown. If you feel an insurance score may be negatively affecting your insurance rate, it doesn’t hurt to shop for better car insurance rates from time to time.

However, there has been data that show how your credit scores and auto insurance rates correlate.

According to The Zebra’s “The State of Auto Insurance Report for 2016,” drivers with poor credit scores (524 or less) have an average insurance premium of $2,411, while drivers with excellent credit scores (823 or higher) pay only $1,130 on average, which is a savings of 53 percent.

Additionally, improving from one credit tier to the next, such as from fair to good, can save drivers an average of 17 percent each year, the report says.

Suddenly a bit more curious to check your credit scores? Remember, you can check your credit scores and reports from TransUnion and Equifax for free with Credit Karma.

How do credit scores and insurance scores relate to each other?

Haney explains the difference between a credit score and an insurance score. “The two are completely separate mathematical equations that use the same inputs to predict two distinct future behaviors,” he says.

Insurance scores use information contained in your credit reports just as credit scores do. However, insurance scores may not use all of the information or may use it differently.

Credit scores are calculated to predict your ability to repay loans, while insurance scores are calculated to predict the likelihood of your making a claim.

When calculating your insurance scores, insurers generally look at the length of your credit history, number of accounts in good standing, payment history, credit utilization rate, collections accounts and recent applications for credit. That said, laws vary by state, so what is used may vary on a state-by-state basis.

Can I check or improve my insurance scores?

Checking your insurance score from TransUnion is free and easy on Credit Karma. If you feel as if you want to improve your scores, there are a few things you can do, or avoid doing, to improve them.

Responsible activity can increase your insurance scores. Making all of your credit card payments on time, keeping your credit utilization down and having numerous accounts in good standing can help your scores.

You may also want to keep your oldest accounts open to show a long-established track record.

On the other hand, some actions will lower your insurance scores. Avoid making payments after the due date and allowing accounts to go to collections. You also want to avoid a high credit utilization ratio. Finally, many recent applications for new credit may hurt your scores too.

Bottom line

Auto insurers are always looking for new ways to better predict the risk that an insured customer may file a claim. Auto insurance scores are just one tool insurers use to accomplish that goal.

Now that you know that information from your credit reports is used when calculating your insurance scores, you can work on improving your credit history with the goal that your insurance scores may increase and your auto insurance rates may decrease.